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Business Economics > Elasticity > Flashcards

Elasticity Flashcards

1
Q

In PED, what happens when QD is not very responsive to a change in price?

A

The price rises a lot and the equilibrium price doesn’t change much

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2
Q

In PED, what happens when the QD is responsive to changes in price?

A

The price barely rises and the equilibrium price changes a lot

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3
Q

How does a demand curve reflect PED?

A
  • Steep curve = unresponsive

- Demand curve almost flat = responsive

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4
Q

What is PED?

A

Measures responsiveness of the QD of a good to a change in price when all other influences on buying plans remain the same

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5
Q

What is the PED formula?

A

PED = percentage change in QD/percentage change in price

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6
Q

How are accurate measures of PED derived?

A

Average price and average quantity used to give the most precise measurement of elasticity, it uses the midpoint.

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7
Q

How is the midpoint of price and quantity derived?

A
  • Difference / midpoint = average quantity

- Difference / midpoint = average price

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8
Q

Why does elasticity have a minus sign?

A

Minus sign because when the price of a good increases, the demand decreases = always a negative number

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9
Q

When is it clear that demand is perfectly inelastic?

A

If QD remains constant when the price changes, the PED is zero and the good is said to have a perfectly inelastic demand. Inelastic demand if PED between 0-1

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10
Q

What is unit elastic demand?

A

If % change in QD equals % change in price = PED of 1 and called unit elastic demand

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11
Q

What factors influence the PED?

A
  • Closeness of substitutes
  • The proportion of income spent on the good
  • The time elapsed since the price change
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12
Q

How does the closeness of substitutes influence demand?

A
  • Closer substitutes = more elastic demand is
  • Oil demand is inelastic as no close substitutes
  • Food and shelter = necessities = have poor substitutes
  • Exotic vacations = luxuries = usually has many substitutes
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13
Q

How does the proportion of income spent on the good influence demand?

A
  • The greater the proportion spent on the good, the more elastic is the demand for it
  • If the price of gum rises, will probably buy the same gum
  • If the price of houses rise, will have to buy a smaller house
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14
Q

How does the time elapsed since the price change influence demand?

A
  • The longer the time that has elapsed since the price change, the more elastic the demand
  • If likely to be long term, people will change buying habits
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15
Q

How does total revenue change according to elastic demand?

A

If demand is elastic, a 1% price cut increases the quantity sold by more than 1% and total revenue increases

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16
Q

How does total revenue change according to inelastic demand?

A

If demand is inelastic, a 1% price cut increases the quantity sold by less than 1% and total revenue decreases

17
Q

How is total revenue affected by unit elastic demand?

A

If demand is unit elastic, a 1% price cut increases the quantity sold by 1% and total revenue does not change

18
Q

What is the total revenue test?

A
  • If a price cut increases total revenue, demand is elastic
  • If a price cut decreases total revenue, demand is inelastic
  • If a price cut leaves total revenue unchanged, demand it unit elastic
19
Q

What is income elasticity of demand?

A

A measure of responsiveness to a good or service to a change in income, other things remaining the same. It tells us how much a demand curve shifts at a given price.

20
Q

What is the formula for YED?

A

YED = % change in QD/% change in income

21
Q

What are the outcomes of YED?

A
  • Positive answer and greater than 1 = normal good, income elastic
  • Positive and less than 1 = normal good, income inelastic
  • Negative = inferior good
22
Q

What happens when YED is negative?

A
  • If income elasticity is negative, the good is inferior
  • This means the QD and amount spent decreases as income increases
    E.g non branded goods
23
Q

What is cross elasticity of demand?

A

A measure of the responsiveness of the demand for a good to a change in the price of a substitute or a complement, other things remaining the same.

24
Q

What do positive and negative elasticities mean for XED?

A

Positive answer = substitute

Negative answer = complement

25
Q

What is the formula for XED?

A

XED = % change in QD / % change in price of substitute or complement

26
Q

What is the elasticity of supply?

A

Measures the quantity supplied relative to a change in the price of a good

27
Q

What is the formula for SED

A

SED = % change in QS / % change in price

28
Q

How do we determine whether supply is elastic or inelastic?

A
  • If elasticity of supply is greater than 1, supply is elastic
  • If elasticity of supply is less than 1, supply is inelastic
29
Q

What factors influence the elasticity of supply?

A
  • Resource substitution possibilities

- Time frame for supply decision

30
Q

What are resource substitution possibilities?

A

Goods that can only be produced with unique resources have an SED of 0, if they are produced with commonly available resources SED is high

31
Q

How does the time frame of the supply decision influence SED?

A

It depends whether it is momentary supply, short run supply or long run supply

32
Q

What is momentary supply?

A

When the price of a good changes, the immediate response of the QS is determined by the momentary supply of that good. It means that if price changes on a given day, producers cannot change their output e.g crops as they have to be grown in advance = inelastic

33
Q

What is an example of a good with a perfectly elastic momentary supply?

A

If price of telephone calls increased, could supply more instantly

34
Q

What is short run supply?

A

The response of the QS to a price change when only some of the possible adjustments to production can be made is determined by short run supply

35
Q

How elastic are most goods in the short run?

A

Most goods have an inelastic short run supply, to increase output in short run, firms must work their labour force overtime and perhaps hire additional workers. To decrease their output in the short run, firms must either lay off workers or reduce their hours

36
Q

What is long run supply?

A

The response of QS to a price change after all the technologically possible ways of adjusting supply have been exploited is determined by long run supply (ELASTIC)

Business Economics (14 decks)

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